Before the Bell: TSX, U.S. stocks set to drop amid G7 and trade tensions

Canadian and U.S. stocks are set to drop at the open Friday as G7 leaders gathered in Quebec amid ongoing trade and tariff disputes.

U.S. President Donald Trump will be meeting with major world leaders -- including the countries he’s slapped huge tariffs on for steel, aluminum and other goods. Investors are on edge again after a tweet where Trump accused Canada and France of levying “massive tariffs” and establishing “non-monetary barriers.”

This came after French President Emmanuel Macron told reporters that the other six leaders could sign agreements if the U.S. didn’t agree.

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On the TSX, there may also be reaction in the markets to a new political leader in the country’s most populous province. Doug Ford and his Progressive Conservative party won a majority in Ontario’s election Thursday.

Futures for Canada’s main stock index fell on Friday as oil prices dropped on waning Chinese demand and soaring U.S. production, offsetting Venezuelan and Iranian supply worries and OPEC-led production cuts.

Canada also reported that the economy unexpectedly shed jobs in May as hiring declined in the manufacturing and construction sectors, though wages grew at their strongest annual pace in nearly six years, data from Statistics Canada showed on Friday.

The 7,500 decline in employment contrasts with economists’ forecasts for a gain of 17,500 jobs. The unemployment rate held steady at 5.8 per cent, as expected.

Average hourly wages rose 3.9 per cent from a year earlier, matching a pace last seen in July 2012.

The MSCI All-Country World index, which tracks shares in 47 countries, was down nearly half a percent in morning trade in Europe -- though it was still set to break a three-week streak of losses.

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Fears of a trade war, expectations of more rate hikes in the United States, and a wind-down of a massive monetary stimulus in Europe fuelled a risk-off tone in markets, investors said.

The U.S. Federal Reserve is widely expected to raise interest rates for a second time this year next week. The focus is on whether it will hint at raising rates four times in 2018.

An unprecedented U.S.-North Korea summit scheduled for June 12 in Singapore, with Washington seeking to pressure Pyongyang into abandoning its nuclear weapons program, is giving investors another reason for caution.

In Europe, Britain’s FTSE was off 0.37 per cent, Germany’s DAX declined 0.73 per cent and France’s CAC fell 0.24 per cent.

Overseas, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.1 per cent after six straight sessions of gains took it to its highest since mid-March. It was on track for a weekly gain of more than 1 per cent.

Oil prices fell on Friday, reversing early gains as signs of weakening demand in China and surging U.S. output weighed on markets despite support from supply woes in Venezuela and OPEC’s production cuts.

China’s May crude oil imports eased away from a record high hit the month before, customs data showed on Friday, with state-run refineries entering planned maintenance.

May shipments were 39.05 million tonnes, or 9.2 million barrels per day (bpd), according to the General Administration of Customs. That compared with 9.6 million bpd in April.

Further weighing on prices has been surging U.S. output, which hit another record last week at 10.8 million bpd.

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That’s a 28-per-cent gain in two years, or an average 2.3 per cent growth rate per month since mid-2016. It puts the United States close to becoming the world’s biggest crude oil producer, edging nearer to the 11 million bpd churned out by Russia.

The surge in U.S. production has pulled down U.S. WTI crude into a steep discount versus Brent to more than $11 per barrel, its steepest since 2015.

“This is occurring because of the rapid increase in production from U.S. shale coupled with the tightening of supplies elsewhere through the actions of OPEC and Russia,” said William O’Loughlin, investment analyst at Australia’s Rivkin Securities.

Gold firmed on Friday as a rise in risk aversion ahead of G7 talks this weekend lent support, but the metal remained hemmed within its narrowest weekly range in more than a decade as a recovery in the dollar kept a lid on gains.

Expectations that the U.S. Federal Reserve will announce another rate increase next week are also weighing on gold. Higher rates lift the opportunity cost of investing in non-yielding assets such as bullion.

Gold has moved little since last Friday’s close, with the spread between its highs and lows the narrowest of any week since August 2007 at just US$13.70 an ounce.

“There are offsetting factors - now you have some upside to the dollar, but at the same time you have a bit of noise coming up on the trade side with the G7 upcoming,” ABN Amro analyst Georgette Boele said.

Next week’s Fed meeting, and a meeting of the European Central Bank, are also in focus, she added. “It’ll be important what the direction from the Fed is,” Ms. Boele said . “We are still expecting two more hikes after next week.”

Currencies

The Canadian dollar fell Friday and was below the 77 US cent mark amid trade jitters and lower oil prices. Lower jobs figures also caused a dent in the loonie.

The U.S. dollar was set for its biggest weekly drop in 11 weeks while perceived safe-haven currencies like the Japanese yen and the Swiss franc climbed on Friday as markets shifted to wait-and-watch mode before an event-packed week.

Before a likely acrimonious G7 meeting was due to kick off in Quebec later in the day, traders cut risky bets after three weeks of gains in equities and higher-yielding assets.

Next week’s expected hike in U.S. interest rates, a European Central Bank policy meeting and a Brexit bill vote all pose risks for currency traders and could yank currencies out of recent trading ranges.

“A combination of the G7 meeting and other major events such as the Trump-Kim summit next week is also keeping investors on edge,” said Constantin Bolz, a fund manager at Portfolio Concept, a German-based private wealth management firm.

While the dollar edged a quarter of a percent higher against a basket of its rivals at 93.65, it was poised to notch up its biggest weekly drop since late March.

Stocks to watch

Airbus SE is set to close a deal to take a controlling stake in Bombardier Inc.’s CSeries jetliner program, effective July 1, the companies said, in a move expected to kickstart the European plane maker’s ability to put its marketing and cost-cutting muscle into the Canadian plane program.

Canada’s Senate on Thursday voted to legalize recreational marijuana, clearing a major hurdle that puts the country on track to become the first Group of Seven nation to permit national use of the drug. Marijuana stocks such as Aurora Cannabis and Canopy Growth could see some reaction.

Oil producer BP Plc complained to Canada’s National Energy Board (NEB) regulator about Enbridge Inc.’s implementation and then abrupt reversal of new rules for shipping crude on its Mainline pipeline system, NEB documents showed on Thursday.

Economic news

(8:15 a.m. ET) Canadian housing starts for May. Estimate is an annualized rate rise of 2.2 per cent.

The Canadian economy unexpectedly shed jobs in May as hiring declined in the manufacturing and construction sectors, though wages grew at their strongest annual pace in nearly six years, data from Statistics Canada showed on Friday.

The 7,500 decline in employment contrasts with economists’ forecasts for a gain of 17,500 jobs. The unemployment rate held steady at 5.8 per cent, as expected.

Average hourly wages rose 3.9 per cent from a year earlier, matching a pace last seen in July 2012.

The Bank of Canada has said it is closely watching income growth as it considers whether to raise interest rates again next month.

The decline in jobs last month was driven by a 31,000 drop in full-time positions, while part-time work rose by 23,600. On a sector basis, goods-producing industries led the way down, with an 18,300 decline in manufacturing jobs and a 13,000 drop in construction.

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